Why consider a Roth IRA Conversion?

Roth IRA rules can appear limiting at first glance—but you may be able to fund a Roth by rolling over funds from another account.

Say you want to fund a Roth IRA to take advantage of those tax-free withdrawals in retirement, but your income is too high to contribute directly to a Roth IRA. 

The good news: Roth IRA rules allow you to get around this restriction if you convert funds from a traditional IRA to a Roth.

See step-by-step instructions for converting your Traditional IRA to a Roth IRA.

There are no income limits (since 2010) for converting to a Roth, and no limit on the amount you can convert. If your traditional IRA is already at Betterment, the conversion just takes a couple of clicks.

The not-so-good news: In most cases, when you convert funds from a tax-deferred account to a Roth, it’s considered a taxable event, meaning you may owe taxes on some or all of the amount converted.

How can you minimize the tax hit?

One strategy that could enable you to take advantage of a Roth, but not get hit with a super high tax bill, is to do what’s known as a backdoor Roth contribution—the how-to is detailed below—or plan ahead and take advantage of upcoming life or career changes that could nudge you into a lower tax bracket.

Here’s how to make that Roth conversion happen.

Note: Betterment is not a tax advisor, nor should any information in this article be considered tax advice. You should contact a tax professional to discuss your specific situation.

High Earners Go For Roth IRAs

If a Roth account sounds appealing, you’re in good company. Roth IRAs suit many high-income earners because they want a way to help minimize taxes in retirement—and unlike distributions from a traditional IRA, Roth funds are withdrawn tax-free if they meet basic requirements.

Indeed, when the IRS removed the income limit on Roth conversions in 2010, the number of conversions “increased over 800%, to $64.8 billion,” according to a January 2014 IRS report. It was the first time conversions exceeded contributions. And 57% of the conversions were from people with six-figure incomes.